ON 25 MAY 1932, with Australian politicians slashing wages and public works programs in futile efforts to ease the great depression, a remarkable article by John Maynard Keynes was published in the Melbourne Herald newspaper. Four years before his ground-breaking General Theory of Employment, Interest and Money, the great economist advised Herald readers that “there is more chance of improving the profitableness of business by fostering enterprise and measures like public works than by furthering pressures on money wages…” Declaring that Australian policy-makers were inclined to be “too drastic,” Keynes advised: “Above all, expand the internal bank credit and stimulate capital expenditure as much as courage and prudence allow.” The article was a prelude to what Keynes would elaborate in The General Theory.
Politicians and their orthodox economic advisers rejected Keynes’s advice – which had apparently been commissioned by a Herald editor aware of his reputation and his views – and the depression ground on relentlessly with huge numbers of Australians suffering poverty, unemployment, homelessness and hopelessness.
It’s a different story these days. As the current global crisis has unfolded governments and their advisers throughout the world, including Australia, have rushed to embrace solutions generally described, rightly or wrongly, as “Keynesian”: surpluses have been spent, banks and bank deposits have been protected, demand has been stimulated by interest rate cuts and government hand-outs, and major public works projects have been brought forward (or “fast-tracked”, as Keynes would never have said).
Remarkably these initiatives have been taken after a period of more than thirty years in which “neo-classical” economic policies had replaced Keynesian policies as the global economic orthodoxy. Neo-classical policies were grounded in a belief that economic systems tended naturally towards equilibrium, where markets cleared and all resources were fully utilised. What was required were free markets, private enterprise and minimal government intervention. The various strands of neo-classical economic policy essentially reflected a faith in laissez-faire economic management in the pursuit of long-run growth.
Not surprisingly, the revival of “Keynesian” economic approaches has spawned a rush of commentary that can probably be summed up in the slogan “We are all Keynesians now.” One Australian newspaper, apparently unaware that Keynes was not a socialist, has even proclaimed: “The state is back.” Similar cliché-laden assessments appeared in newspapers in the 1980s and 1990s when less dramatic economic downturns prompted governments to embrace stimulatory economic packages. Even the Australian Financial Review was not immune from speculation about the revival of Keynes.
But the claim that Keynes is back is arguably sentimental and superficial. It may be closer to the truth to argue that Keynes never really went away and that in the current crisis there are simply no alternatives to the broadly “Keynesian” approaches now being attempted. Keynes has re-emerged because there seems be be no other way of ameliorating at least some of the difficulties facing economies around the world.
Selwyn Cornish of the Australian National University is a distinguished historian of economic ideas who supports this view. So does Professor Ian King, professor of economics at the University of Melbourne and director of the university’s centre for macroeconomics.
“There is a fundamental difference between the economics of Keynes and the exaggerated stuff that is called Keynesianism,” Cornish, who wrote the entry on Keynes in the Biographical Dictionary of British Economists, says. “People don’t understand what Keynes was on about. He was not all for government intervention and not an advocate of nationalisation. He was concerned that aggregate demand should be maintained at full employment level.”
Professor King says current policy directions are not “consciously Keynesian.” “But the reality is that there is no alternative. When the private sector has problems and can’t fix itself up, the only alternative is the public sector… The question is what measures should be taken and how should they be constructed. We are trying to work that out now,” he added.
According to Cornish, “Before the General Theory most of his writing advocated central bank intervention to control interest rates to preserve high levels of economic activity. With the depression he realised this was insufficient and there needed to be more government spending. He was not opposed to monetary authorities or government itself using policy instruments to maintain high levels of economic activity.”
Cornish argues that Keynes would have supported the policy of Australian governments in running up surpluses in prosperous times. “Now he would be saying there should be some increase in government spending and cutting taxes. He was more interested in increasing spending than in cutting taxes. He had the idea that governments would put spending into useful infrastructure development… part of what’s happening now it is what Keynes would advocate if he was alive today and what he did advocate in the 1930s”.
Keynes did not advocate the sort of action taken recently by the US, British and European governments to increase and protect the capital of banks, says Cornish, although it was probably a good idea. “Keynes was more concerned with the economic crisis. In Australia we have not had a financial crisis, but we may be jumping over that to possible economic crisis and some other countries will soon be doing things now being done in Australia.”
Asked whether current policies marked the end of the ascendancy of the neo-classical economic program, Cornish observed: “There is a tendency for these swings in economic ideology and policy to be exaggerated by commentators and some academics.”
Professor King’s views are similar. The neoclassical project, he says, is about long-term growth. “To a large extent it was somehow taken over by a view that regulation was something we had to minimise and distrust… but most economists… know… there are many economic functions that require public action, including regulation.” He offers the analogy of the fire alarm. “In normal times people say ignore Keynes and pursue long-term growth. But when things go wrong people break the glass and call out the General Theory.”
So, whether or not Keynes “is back,” Australians have his policy prescriptions to thank by default for any benefits they derive from the Rudd government’s decision to spend $10 billion of the surplus to ease the effects of economic hardship. It is a remarkable contrast to the actions of depression prime minister Joe Lyons, who was focused overwhelmingly on reducing wages and government spending. In a famous passage in the General Theory, Keynes observed: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” Lyons was clearly a slave to the views of his pre- and anti-Keynesian advisers. Rudd is not.
Keynes was, moreover, hostile to the general equilibrium assumption of the laissez-faire advocates. As early as 1926 he wrote: “It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest.” Perhaps most significantly, he did not he see economic planning as an encroachment on “freedom.” In 1944, two years before his death, Keynes wrote to Friedrich Hayek about his book The Road to Serfdom, which argued against economic planning. While acknowledging that he agreed with most of the book, Keynes took Hayek to task over his attack on planning.
“You agree that a line has to be drawn somewhere, and that the logical extreme is not possible,” he wrote. “But you give us no guidance whatever as to where to draw it… [A]s soon as you admit that the extreme is not possible, and that a line has to be drawn, you are, on your own argument, done for, since you are trying to persuade us that so soon as one moves an inch in the planned direction you are necessarily launched on the slippery path which will lead you in due course over the precipice.”
Keynes’s logic, of course, is impeccable; his judgement is mature and balanced. The question is not whether or not Keynes is “back” but whether today’s politicians can put together packages for economic and financial recovery with similar logic and balance. •